Split may force Malaysia Air to rework strategy
By EILEEN NG
KUALA LUMPUR, MALAYSIA
State-owned Malaysia Airlines' split with budget carrier AirAsia just eight months after they joined forces may jeopardize its plan to recover from hefty losses by focusing on premium business, analysts said Thursday.
A share swap deal between the airlines that they signed in August to end their rivalry and boost business was canceled on Wednesday. Furious airline union protests against the deal put pressure on the government ahead of general elections expected later this year. The airlines said they will continue to collaborate in procurement and aircraft maintenance.
As more regional full-service carriers set up no-frills units to win passengers, analysts said Malaysia Airlines -- which has ceded all low-cost routes to AirAsia -- may find it tough to bank on the premium sector alone.
"Almost every airline in the region adopted a second brand to tap growth and profit in the budget sector. Instead of doing so, Malaysia Airlines took an extremely unusual step in trading that in for a partnership with AirAsia," said Brendan Sobie, analyst in Singapore with the Centre for Asia Pacific Aviation.
"The benefits of the collaboration with AirAsia can still be realized. But without the equity deal, will there be enough benefits to allow Malaysia Airlines to focus on the premium market without following other regional carriers to have a dual brand strategy," said Sobie.
Singapore Airlines -- one of the world's most profitable carriers -- will launch a new long-haul budget carrier named "Scoot" in June as it seeks to diversify amid fierce competition from Gulf and Asian rivals in the first and business class markets.
"Thai Smile" will takeoff in July as a new service by Thai Airways to capture the budget and medium-cost market. Philippines Airlines also plans to position its subsidiary Air Philippines as a low-cost regional carrier to regain market share lost to budget rival Cebu Pacific.
Garuda Indonesia has its own low-cost wing, Citilink, while Vietnam Airlines took a majority stake in budget liner Jetstar Pacific.
Under the pact that was unwound, Tune Air, the parent of AirAsia, would have taken a 20.5 percent stake in Malaysia Airlines. In return, government investment arm Khazanah was to have a 10 percent stake in AirAsia.
Following the deal, Malaysia Airlines trimmed operations at Firefly, set up in 2007 as a regional carrier that was competing heads-on with AirAsia. Malaysia Airlines also planned to launch a premium regional carrier but that plan was scrapped after union protests.
Khazanah has said the cross-holding of shares has become a distraction in turning around Malaysia Airlines. The unwinding of the pact highlighted how government ownership makes it tough for the national carrier to stick to its business plans and compete effectively.
Malaysia Airlines has had multiple business recovery plans in recent years and while they have made some improvement, the restructurings haven't gone deep enough to produce real change, analysts said. The flag carrier said it was in crisis after suffering a hefty 2.52 billion ringgit ($832 million) loss last year.
"The issue is how will Malaysia Airlines fix itself. It is bleeding and need to manage costs prudently. It is facing turbulent times amid an environment of high jet fuel prices and intensifying competition," said Ahmad Maghfur Usman, an analyst with OSK Research.
With competition expected to intensify, Malaysia Airlines faces more pressure to cut costs. It has said it will cut routes by 12 percent this year, but faces a tough task of cutting a bloated work force of 20,000 employees which makes it inefficient, analysts said.
"Restructurings are not easy in government-owned carriers," said Sobie.
"The track record for Malaysia Airlines is not very envious and there are a lot of skeptics out there," he said.
http://www.businessweek.com/ap/2012-05/D9UH49780.htmLink to web
Some earlier analysis"Strategic Planning- worth reading/ a good assignment for reference"
